Magazine

Inside Wall Street

May 21, 2008

Why the Time May Be Ripe to Buy GE

For years, one stock that portfolio manager Diane Jaffee of the TCW Dividend Focused Fund has steered clear of is General Electric (GE). While the company has increased its operating margins and cash flow during the seven years since Jeff Immelt took over as CEO, Jaffee wasn't convinced that the anemic stock would budge. But crushing first-quarter news and the many investors who have lost faith in GE have brought out the avid value investor in her. "The market is fatigued, and that is the opportunity with GE now," says Jaffee. GE is the No.2 holding in her $1.4 billion fund as of Mar. 31. "The way to make money in large-cap names is to go where others won't," she says. "Management is galvanized to make something happen, and that's when we get excited."

Immelt and GE's stock have been roundly punished for falling short of first-quarter projections on Apr. 11—primarily because the market had been reassured just weeks prior that the conglomerate's financial targets were on track. The miss—earnings of 44 cents a share, compared with consensus forecasts of 51 cents—accompanied new guidance for the year of $2.20 to $2.30 a share, down from $2.42. That touched off downgrades such as one from Goldman Sachs's (GS) Deane Dray, who wrote on Apr. 13 that her revised opinion "reflects the near-term loss of GE's position as one of the few bulletproof, consistent earnings growers." GE stock, at 30.99, has recovered a bit lately, but is still 25% off last October's high of 41.77, the peak since Immelt took over in September, 2001.

Jaffee says negative sentiment has obscured favorable developments: Infrastructure orders have added more than $3 billion to GE's backlog. Earnings for that sector rose 17%, to $2.59 billion, representing 41% of GE's total profit. As an insider, Immelt bought 62,000 shares in the open market on Mar. 11. And the stock is cheap: It trades at 8.2 times its price-to-cash flow, vs. the broad market's ratio of 11, while still yielding a healthy 4% dividend.

Scott Lawson at Westwood Holdings Group (WHG) sees GE's plan to sell its appliance unit as a sign that more asset sales are to come. "The guidance has a few more question marks than it normally does, but when there's a stock that people hate, it's time to look at it," he says. Veteran value investor Jim Hardesty of Hardesty Capital Management in Baltimore agrees." [Immelt's] credits are running out with the board," he says. "We'll see high-up management changes, which will give him time to get out of the penalty box." Hardesty adds that while the first quarter was a "nasty speed bump, it was also an anomaly. I just can't see further downside from here."

Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

Finding Value in Chipmaker Nvidia

Santa Clara (Calif.) chipmaker Nvidia (NVDA) (NVDA) has taken the brunt of a skittish market. Fans say the skid was overdone. Nvidia "is now a value-priced growth stock," says John Buckingham of Al Frank Asset Management, publisher of The Prudent Speculator newsletter. "You have excellent growth potential, but you're not paying a fortune." Nvidia makes auxiliary graphics cards for high-quality visuals on PCs—a must for hard-core gamers. It competes with Intel (INTC) and Advanced Micro Devices (AMD), and ranks No.2 in the market for the chips, with 28%. Its balance sheet is solid: no long-term debt and $1.8 billion in cash, or $3 a share. The stock, now at 23, has traded as high as 39.67 in the past year; Buckingham's long-term target is 37. Raymond James Financial's (RJF) Hans Mosesmann pegs it at 46 and calls it a strong buy.

Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.